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Brief Exercise 20-10 Error correction [LO20-6] In 2018, internal auditors discovered that PKE Displays, Inc., had...

Brief Exercise 20-10 Error correction [LO20-6]

In 2018, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $366,000 cost of a machine purchased on January 1, 2015. The machine’s useful life was expected to be six years with no residual value. Straight-line depreciation is used by PKE.

Ignoring income taxes, prepare the journal entry PKE will use to correct the error. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Solutions

Expert Solution

Depreciation is accumulated through years and credited to balance sheet and debited to income statement to reduce the value of machinery.

Straight line depreciation = cost of machine- residual value / useful life of asset

=366000- 0 /6years

=$ 6100 per year

Machinery purchased is capital cost and should be capitalized as asset and not debited as an expense.

Three years of depreciation 2015 2016 and 2017 would be acummulated and debited to retained earnings as expense.

As the expenses has been recorded more by machinery value ,retained earnings would be increased by crediting.

So net effect would be

Account Debit Credit
Machinery 366000
Accumulated depreciation 18300
retained earnings 347700

6100*3years = 18300

Retained earnings =366000-18300

ekkarill92 answered 2 years ago
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